The Gilmo Report

December 4, 2011

December 4, 2011

Wednesday’s big gap-up move through the 50-day moving average met with resistance as the NASDAQ Composite Index approached its 200-day moving average, as we see on the daily chart below. The S&P 500, not shown, also found resistance at its 200-day moving average with volume picking up on the NYSE, in contrast to the lighter volume seen on the NASDAQ this past Friday. The enthusiasm of Wednesday’s move faded by the end of the week, and even a manufactured decline in the jobless rate on Friday, thanks to the omission of 576,000 workers from the labor force, was not enough to keep the market rallying on Friday as the general market indexes reversed and closed roughly flat on the day. The general market’s move straight up from the bottom over the past six trading days makes a pullback here logical, and without a follow-through day or any real leadership emerging in this market I am still left to waiting, watching, and mostly probing this market with small positions to see where any traction can be gained. So far, there doesn’t seem to be much here for investors, much less hyper-aggressive traders like myself, to sink their teeth into. If you can look at the chart below and identify a clear trend, please let me know.

NASDAQ Composite Index Gilmo Report Chart

Slow and steady is probably the way to win the game here, and taking such an approach with gold, for example, has so far produced marginal gains from the pocket pivot buy point of October 25th. It did, of course, require remaining disciplined with respect to selling my initial position in the SPDR Gold Shares (GLD) ONLY IF it violated its 50-day moving average which it never did despite closing below the line nine trading days ago, as we see on the daily chart below. The GLD is now holding tight over the past three days, well above the 50-day and 10-day moving averages and just above the 20-day moving average. Despite the decent price action, volume has not been there, but the QE-induced lift after Wednesday’s Fed announcement regarding dollar swap facilitation for foreign banks has held so far. However, the GLD has not issued any new buy signals with which to add to a position in the yellow metal ETFs. For now I would look for the GLD to continue holding above the 50-day moving average as we patiently await either another buy signal or an eventual sell signal should the GLD violate the 50-day moving average at any point in the near future.

SPDR Gold Shares (GLD) Gilmo Report Chart

As the market has rallied sharply over the past five days, so have former, broken-down leaders like Apple, Inc. (AAPL), shown below on a daily chart. With the market trapped in what looks to me like a continuing chop zone, anyone who wants to play this market is likely best off approaching it as a market of stocks, something I’ve discussed in many previous reports. AAPL has been a short-sale target of mine for some time, but as one of the biggest market darlings it tends to find support at some point, and most recently this has been at its 200-day moving average. The last six trading days have seen the stock bounce off of the 200-day line as the stock has embarked on a weak, low-volume rally into its 50-day moving average at around 195. AAPL becomes potentially shortable here on the basis of this weak, wedging rally right up into logical resistance, and one could certainly take a short position here using the 50-day moving average at 391.52 or Friday’s high 393.63 as a quick upside stop. The key, obviously, is whether the market rolls over or not, but this is the spot to take a stand if in fact one is inclined to do so, as this is the last line of upside resistance for the stock in this pattern.

Apple, Inc. (AAPL) Gilmo Report Chart


Amazon.com (AMZN) has rallied over the past few days with the market, and its upside move into the 200-day moving average has been helped along by positive news regarding sales of its new Kindle Fire product. As we see in the daily chart below AMZN has also filled the gap-down “falling window” of nine trading days ago while simultaneously being rejected at the 200-day moving average on Friday of this past week. Since, like AAPL, we have maintained AMZN as a short-sale target because of its 2-down-2-up sell signal off the peak (see November 2nd and 9th reports), then this becomes a potentially shortable position for the stock. It could, in a continued market rally, push higher to the 50-day moving average, but this is the first line of resistance in what has been a pattern fraught with much technical weakness. Again, shorting AMZN here is quite possible using the 200-day moving average at around 200 as your guide for an upside stop. As with any short-sale position, success is going to depend on the market giving it up on this recent rally and rolling over again, so I would not seek to linger too long on the short side if the general market continues to show bizarre QE-induced upside movement.

Amazon.com (AMZN) Gilmo Report Chart

In my report of last weekend I included Baidu, Inc. (BIDU) as another of my “big stock” NASDAQ short-sale targets, and like AAPL and AMZN it also rallied into logical resistance, this time at the 200-day moving average for BIDU, as we see in the daily chart below. Note the severe lack of volume on this wedging rally, which makes this move potentially shortable using the 200-day moving average at 135.08 as your guide for an upside stop. In order to confirm a rejection at the 200-day line I would like to see some selling volume come in here to knock BIDU back below its 50-day moving average. Note, however, that it has been three weeks since BIDU formed a “black cross” when its 50-day moving average moved below its 200-day moving average. BIDU’s weekly chart, not shown, reveals that it is currently trapped within a very wide, loose base that has the look of a head and shoulders type of formation (see November 27th report), and if this pattern is going to fail then my estimation is that this is the point at which it will do so. If anything, BIDU is a good example of the dangers inherent on the short side as this rally has taken it from around 119 up to 135 on virtually no buying interest, a literal upside vacuum.

Baidu, Inc. (BIDU) Gilmo Report Chart

Another short-sale target, Salesforce.com (CRM), has rallied up into the low end of its gap-down “falling window” of ten trading days ago, as we see on the daily chart below, at around 120. CRM picked up several buy recommendations this past week, some touting $160 to $205 price targets, which helped to propel it higher, but it is now right up into this zone of resistance that I’ve highlighted on the chart and which I first discussed in my report of this past Wednesday, November 30th. The high end of this “falling window” is around 126, so that is the next possible resistance point from here, although I tend to view these resistance levels as “zones” since stocks don’t always stop on a dime at the moving average or whatever is the textbook technical resistance level. CRM picked up above-average buying interest on the two gap-ups over the past week, but buying interest began to fade on Friday as the stock bumped right into the 120 price level. It is possible to short this here using a 3-5% stop, with a 5% stop taking you roughly up to the top of the yellow-highlighted zone of resistance on the chart.

Salesforce.com (CRM) Gilmo Report Chart

I often get questions about Green Mountain Coffee Roasters, Inc. (GMCR), particularly now that the stock has blown apart and is still 51% below its all-time high despite rallying some 66.8% off of its intra-day low of 34.06 of November 11th. Now that everyone has seen GMCR get blistered on the downside, they remain eager to short the stock. To me that seems a bit too obvious, but the rally from 34.06 to Friday’s close at 56.32 has probably run over a lot of late shorts. Buying volume up here hasn’t been all that impressive, but you can see by the volume bars on the daily chart below that there also have not been a lot of sellers coming into the stock. One could consider that last huge-volume gap-down move as something of a “selling exhaustion” type of gap, and of course this is supported by the objective evidence provided by the stock’s action since that big-volume gap-down meltdown. As I see it, for the most part, GMCR is one for the short-selling model books at this point, and I would focus on new short-sale opportunities, if any, that might be developing. That said, the stock is pushing up into possible resistance here, but it is not clear whether it would make all that profitable of a short at this stage of the game.

Green Mountain Coffee Roasters, Inc. (GMCR) Gilmo Report Chart

Among the stocks that I’ve discussed on the long side in my reports over the past month or so, names like ISRG, CMG, BIIB, PNRA, UA, and HANS are trying to build bases here, despite the choppy action, but not much more. Ulta Salon Cometics and Fragrances (ULTA) is another one I’ve discussed in previous reports, however after breaking out five weeks ago the stock fell back into its prior base and below its 10-week (50-day) moving average. ULTA flashed a pocket pivot buy point on Friday after anouncing very strong earnings growth, and the stock is attempting a “re-breakout,” as we can see on its weekly chart. Interestingly, this breakout is showing the highest weekly volume since September 3, 2010, when the stock was languishing but reversed on the weekly chart back to the upside to spark a steady price run over the next 10 months. The one thing that really strikes me about ULTA’s weekly chart are the numerous big blue upside volume spikes along the bottom, and, more importantly, that its chart has the look of a slightly ascending base formation, but would need to break out to a new high to complete an ascending base breakout. This could be potentially buyable given the Friday pocket pivot buy point which may be presaging new highs.

Ulta Salon Cometics and Fragrances (ULTA) Gilmo Report Chart

Another stock that had what I consider interesting price/volume action this past week was Lululemon Athletica, Inc. (LULU), shown below on a weekly chart. LULU came out with earnings Wednesday after the close and got slammed for 20% on the open on Thursday to 41.70 before rallying all the way back up to a close of 47.17. Friday saw the stock gap up right up to its 200-day moving average to close roughly even with its Wednesday close, before it announced earnings. When I look at LULU’s weekly chart I see a tremendously massive-volume support week in this big base structure that has three selling waves in it prior to this past week’s big supporting action. Based on the weekly chart I would expect this stock to try and go higher. The trick here is to determine the buy point, and while the stock is still below both its 10-week/50-day and 40-week/200-day moving averages, there is one possible way to buy this.

Lululemon Athletica, Inc. (LULU) Gilmo Report Chart

To figure this one out we need to look at a daily chart of LULU where we can see that the stock formed a low seven trading days ago at the 46 price level. Thursday’s action caused the stock to “shake out” below this 46 price level and Friday’s gap-up move took the stock up through a shakeout-plus-three buy point at 49, and the stock closed Friday at 49.69. It might scare you to buy it right here as it nudges up into its 200-day moving average from the underside, but if the general market persists in moving higher here this may very well go higher as well. The easy way to play this trade would be to buy it here, under the 200-day line, using the prior 46 shakeout low as your stop.

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If I’m going to try and trade this market then my approach is either going to be governed by a slow and steady approach with the precious metals, whose technical action and context I can make sense of, or more aggressively by looking at individual stocks on their own merits alone as potential long or short ideas, treating the market as a market of stocks rather than a stock market, as I am fond of saying. My work over the weekend shows me that there are discernible and workable ideas on both the long and short side here, and with the market in a rally without a follow-through day, this approach is most likely to keep me fluid and flexible, and able to move quickly with any true trend if and when one ever develops here. Otherwise, if I don’t see anything that looks in the right position to play long or short, the best approach is no approach at all, remaining mostly in cash waiting for the next strong opportunity to show its face.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in AGQ and DGP, though positions are subject to change at any time and without notice.

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